Lynas takes step closer to REE production

Lynas Corporation (LYC-A) has been developing its large rare earth project in Western Australia for more than 10 years, and a decision earlier this month by Malaysia’s Atomic Energy Licensing Board (AELB) has brought the project a step closer to the finishing line.

At the end of August Lynas had completed the first phase of construction of its “Lynas Advanced Materials Plant” (LAMP) near Kuantan in Pahang, Malaysia, but it still needed a Temporary Operating Licence (TOL), so that it could transport rare earth concentrate from its Mount Weld project in Australia to Malaysia, and prepare for the first feed to the plant’s kiln.

Executive chairman Nicholas Curtis said the Sept. 5 licence was a milestone for the company. The TOL is good for two years, during which time the AELB will monitor the state-of-the-art rare earth processing plant to make sure it complies with safety standards. If all goes smoothly during the first two years of LAMP’s operation, Lynas will be eligible for a full operating licence.

Much of the initial concern about LAMP and the reasons for the delays in nailing down the TOL had to do with storing and managing radioactive waste and residue from the refining process.

Lynas vowed that these materials of concern would be removed through conversion into co-products, and then exported.

Malaysia was chosen as the site for LAMP due to the country’s industrial infrastructure, including industrial land, sources of gas, water and electricity, reagents from local suppliers and a port that can manage container, chemical and bulk shipments. The area also has a good source of labour, and regulatory infrastructure includes clear legal frameworks, foreign direct-investment incentives and accountable regulators, the company says.

Under LAMP’s recently completed phase-one construction, the facility has a production capacity of 11,000 tonnes per year. Under phase two, that doubles to 22,000 tonnes per year.

While the TOL was good news for Lynas, not all analysts shared the company’s enthusiasm — Jon Hykawy of Bryon Capital Markets in Toronto has a “sell” rating on the stock. “Based on the fact that our price target of A60¢ was based on full phase-one production of 11,000 tonnes being monetized in 2012, and that our project rare-earth oxide (REO) prices for this year have proven high, year-to-date, we will maintain our ‘sell’ rating and target price,” he explained in a note after news of the TOL was announced. At press time in Australia, Lynas was trading at A88¢ per share.

Hykawy notes that his Lynas model and his previous estimate had been based on essentially no production in 2012, but full phase-two output of 22,000 tonnes of total rare earth oxides (TREO) and selling all produced materials in 2013. “This is not going to be achieved,” he writes, “given the company’s statements that phase-two output levels will only be achieved by the end of 2013, further assuming the TOL imposes no limitations.”

The clean technologies and materials analyst also pointed out that there are few details known about the TOL.

“Lynas’ boss Nicholas Curtis is quoted as saying that Lynas will reach 22,000 tonnes per annum production of TREOs by the end of 2013. However, the public statements by Malaysian AELB director-general Raja Dato Abdul Aziz Raja Adnan seem less optimistic. His statements suggest that the TOL ‘will enable Lynas to conduct trial processing of lanthanide concentrates in stages, and in limited quantities, under close and continuous surveillance by the authorities. What those stages and limited quantities might mean is unclear.’”

Hykawy argues that the project ramp-up has not been de-risked. “We must wait for the arrival of feedstock to see if LAMP is capable of producing product in the manner and at the specification required,” he reasons. “We do not know — if any restrictions are placed on quantities of production by the Malaysian AELB — what impact the TOL might have on Lynas’ present offtake agreements.”

Kaiser Research Online editor John Kaiser expressed his own concerns in May — long before the TOL was granted. “Although it seems like overcoming political opposition in Malaysia is Mount Weld’s biggest obstacle, the key upcoming milestone will be a demonstration that the LAMP facility will crack and separate the supergene-enriched monazite minerals in the concentrate to which the rare earths report,” the independent analyst writes to clients. “Because Lynas has positioned itself as a ‘commodity’ supplier, with much of its projected output already spoken for by offtake agreements, the stock at this stage is largely a fully valued speculation about future cash flow whose upside is fairly well constrained, but which leaves plenty of downside in the event problems arise, as they inevitably do in the rare earth sector.”

Mount Weld is the richest known deposit of rare earths in the world, according to Lynas. Once in production, it could provide much-needed balance in an industry dominated by production from China.

In August, Beijing authorities released rare-earth export quotas for 2012 of 30,996 tonnes. Of those export quotas for companies producing rare earths in China, 27,122 tonnes are for light rare earths and 3,874 tonnes are for medium- to heavy-rare earths, according to figures from Technology Metals Research, a U.S.-based consulting firm.

This year was the first time China split quota allocations into light and medium- to heavy-rare earths.